UK in transition: the uncertainty principle

Key points:

UK growth has been on a downward trend in recent years. Persistent uncertainty surrounding the outcome of Brexit negotiations, weaker external demand and rising protectionist risks mean conditions for growth will remain tough.

The process of exiting the European Union (EU) is likely to persist as the main influence on the economy for a long time. Our base case is that the UK will eventually land not far from its pre-Brexit status, but the process is likely to be bumpy and drawn out.

In this scenario, growth is likely to be lacklustre, reflecting a decline in economic potential. The supply side of the economy has weakened, reflecting poor productivity growth and unfavourable demographic dynamics.

The Bank of England will probably maintain that a gradual and limited hiking cycle remains appropriate. But further tightening will be conditional on a smooth Brexit transition, an assumption that could unravel.

The policy mix is likely to change, with the fiscal lever taking the front seat at the expense of monetary policy, especially in a no-deal Brexit scenario. The government has already softened its stance on fiscal austerity and the upcoming budget could see further easing.

Irrespective of the type of Brexit that eventually emerges, UK policymakers must ensure that tackling low productivity growth remains at the top of the agenda.

Silvia joined the international business of Federated Hermes in October 2017. As an experienced global economist, she is responsible for providing macroeconomic analysis and commentary, non-standard macroeconomic modelling, and developing relationships with key central banks and monetary authorities. Silvia previously spent 10 years at Prologue Capital Ltd, latterly as a global economist responsible for the team’s macroeconomic view. She holds a Master of Science in Economic and Social Sciences, as well as a Bachelor in Economic and Social Sciences, from Bocconi University in Italy.